The Australian Tax Office has issued new technical interpretations of Australia’s corporate tax residence rules. A revision has been made to the central management and control (CMAC) exam. As a result, companies with Australian directors can now be tax residents of Australia even if their commercial operations are conducted elsewhere.
What does this mean for NZ companies?
NZ companies with Australian directors can now be tax residents of both Australia and NZ, making them dual resident companies. Under the NZ tax regime, there are many beneficial tax regimes that currently do not apply to dual resident companies and there is now the opportunity to broaden the regimes to include dual resident companies.
Proposed Amendments
The amendments will allow dual resident companies to offset their tax losses against the profits of another company in the same group. A dual resident company will now be allowed to be a member of a consolidated group.
There are three tax regimes where changes were made to resolve concerns with application of Australia’s residence rules:
Loss Grouping Rules
The residence requirements have been amended so that the loss grouping rules are now applicable to dual resident companies. The section requires that a NZ resident company must not be a DTA or non-resident company or liable for tax in another jurisdiction for the duration of the commonality period.
This means companies that are tax resident of both NZ, and another jurisdiction would be able to offset their losses against the profits of another company in the same group of companies for NZ tax purposes. This is reliant on the fact that the company still satisfies other requirements including being incorporated in NZ or carrying on business through a fixed establishment in NZ.
Commonality periods starting before 15 March 2017
The loss grouping rules require a loss company and profit company to maintain common ownership (voting and market interests of at least 66%) over a period. The commonality period commences at the start of the income year in which the loss company incurs loss to the end of the income year in which the loss is used by the profit company.
In order to offset a loss that arose before 15 March 2017, either of the 2 companies may still be dual residents provided that the dual residence began after 15 March 2017.
Consolidation Rules
The amendments would allow a dual resident company to be a member of a consolidated group of companies. This will now be possible without meeting the requirement of the company not being a foreign company and or liable for income tax in another jurisdiction
Example
NZ resident company Ice Spice is tax resident in both NZ and Australia. In the 2021-2022 income year they have a net loss of $50,000. In the 2022-23 income year Ice Spice has net income off $0 and carried forward losses.
Ice Spice Ltd has common voting and market interests of 76% with Drake Ltd, a NZ resident company. Drake Ltd has net income of $50,000 for the 2022-23 income year and Ice Spice wishes to transfer their accumulated tax loss to Drake Ltd and therefore this loss will be transferred.
Commentary
Despite the above rights and benefits, it is important to note that there are still complex issues around dual resident companies, and expert advice should be sought to ensure compliance with all tax regulations. Dual residency can also have significant implications for cross-border transactions and other tax issues, so companies must carefully consider their options before making any decisions.
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